When business and divorce collide

 When personal relationships fracture, the fallout often extends beyond the home, and for business owners, the commercial consequences can be dire. The 2024 Federal Circuit and Family Court decision in Emmerton & Manwaring (No 2) [2024] FedCFamC2F 966 offers a sobering example of how poor business governance and entangled family structures can create long-term financial and legal uncertainty.

We have unpacked this case, not from a family law perspective, but through the lens of business risk, corporate structure, trust governance, and tax compliance. It highlights the pitfalls business owners must avoid to ensure that the collapse of a relationship does not drag a business down with it.

Background: The Marriage, the Business and the Breakdown

The parties in Emmerton & Manwaring were married for 28 years. During the marriage, they built a business, B Pty Ltd, which was incorporated in 2001 for the purpose of asset protection. The husband was the sole director and majority shareholder; the wife held one share and acted as company secretary. They also created the Manwaring Family Trust in 2003, through which they acquired and managed various income-generating properties.

After the marriage ended in 2016, the business, which was once a viable operation, deteriorated significantly. Over the following years, the wife alleged that the husband mismanaged the company, treated business funds as his personal “piggy bank”, and neglected critical tax and reporting obligations. By 2023, B Pty Ltd was in voluntary liquidation, with significant outstanding debts to the ATO, including PAYG, GST and Division 7A exposures.

The Court ultimately found that the parties’ business and financial affairs had become “an omnishambles”, with serious consequences for both their personal finances and future solvency.

Key Business Law Lessons from the Case

1. Structure Alone Does Not Equal Protection

The parties structured their business via a private company and a discretionary trust, which are quite standard vehicles for asset protection. However, the Court’s findings show that form is meaningless without proper function.

Lesson for business owners:
Incorporating a company and establishing a trust is not enough. The benefits of asset protection are quickly eroded if directors fail to maintain separation between personal and business finances. Courts can and do look behind the corporate veil, particularly in family law or insolvency contexts, where mismanagement or misuse of company assets is evident.

Best practice:

• Keep business and personal expenses strictly separated.

• Avoid undocumented loans or withdrawals.

• Ensure any trust dealings (including rental payments and distributions) are properly accounted for and arm’s length.

2. Director Duties and Tax Liabilities Cannot Be Delegated

Following the separation, the husband continued to operate the business, but without the wife’s administrative support or their long-standing accountant. The result? A breakdown in corporate governance, including failures to lodge BAS, maintain records, and pay tax liabilities. The ATO issued a Director Penalty Notice (DPN) for over $100,000 in unpaid PAYG withholding, with further liabilities accumulating under Division 7A.

Lesson for business owners:
Being a director carries ongoing legal responsibilities. Even in emotionally challenging times, directors cannot abdicate responsibility for the company’s financial compliance. Liability for unpaid taxes, superannuation and director loans can become personal, especially where liquidation follows.

Best practice:

• Remain across tax obligations, even if bookwork is outsourced.

• Keep clear, documented loan agreements under Division 7A to avoid deemed dividends.

• Understand DPN risk exposure and act swiftly if notices are issued.

3. Family Trusts Are Not Immune from Conflict

The Manwaring Family Trust was originally set up to hold investment properties and generate rental income. The wife was the sole trustee and continued to manage the Trust after separation. Meanwhile, the husband remained in occupation of the business premises (owned by the Trust) and failed to pay rent to the Trust. This caused mounting liabilities, and added complexity to the property pool division.

Lesson for business owners:
A discretionary trust can be a useful investment and tax tool, but its effectiveness depends on clear, cooperative management. When control is disputed, or obligations (such as rent payments) are ignored, the Trust can become a source of litigation rather than protection.

Best practice:

• Appoint an independent trustee or corporate trustee in family trusts where relationship risks exist.

• Ensure all dealings between the business and the Trust are in writing and enforceable.

• Regularly review the trust deed and trustee appointments to ensure they reflect the current operational reality.

4. Poor Disclosure and Record-Keeping Amplify Legal Risk

One of the most consistent criticisms levelled at the husband was his failure to provide adequate financial disclosure, both to the Court and to the wife. The Court noted that he did not provide key business records, did not disclose his dealings with a second accountant, and made multiple claims without documentation. This conduct delayed proceedings and increased costs substantially.

Lesson for business owners:
Transparency and documentation matter. Whether in a divorce, ATO audit or business dispute, poor records and evasive disclosure can undermine legal standing and credibility. The cost of poor governance often snowballs in litigation.

Best practice:

• Maintain updated and accessible business records.

• If you change accountants or bookkeepers, ensure full handover and transparency.

• In disputes, seek early legal advice on financial disclosure obligations.

5. Liquidation Is Not a Safe Exit Strategy

Midway through the property proceedings, the husband unilaterally placed the company into voluntary liquidation. The Court was unimpressed, particularly as the move occurred without notifying the wife (a shareholder) and seemingly in response to legal pressure. The liquidator reported poor financial records and significant ATO liabilities, and could not exonerate the wife from potential liability due to incomplete information.

Lesson for business owners:
Liquidation is not a shield from accountability. In fact, it can trigger closer scrutiny of director conduct, asset transfers, and pre-liquidation decisions. It also doesn’t automatically protect family members or business partners from associated liabilities.

Best practice:

• Explore restructuring options before considering liquidation.

• Notify all stakeholders, including shareholders and trustees, of any planned insolvency action.

• Cooperate with the liquidator to ensure transparent outcomes.

6. Relationship Breakdown Planning Must Include Business Exit Strategies

At the heart of this case was a failure to plan for the impact of separation on the business. The husband and wife had no shareholders’ agreement, no binding financial agreement, and no strategy for continuing or winding up the business if their personal relationship ended.

Lesson for business owners:
Just as you plan for growth, you must plan for separation, succession or dispute. Emotional bonds can obscure business risks, especially in family-run or spouse-led enterprises. Planning for “what if” scenarios is essential.

Best practice:

• Put in place a shareholder agreement or unit holder agreement.

• Establish dispute resolution processes in business structures.

• Consider a binding financial agreement that addresses business and trust interests.

Conclusion: Governance is Protection

The collapse of B Pty Ltd and the parties’ ensuing six-year legal battle underscore the importance of robust governance, documentation and planning in small businesses. While the Court’s findings were made under family law principles, the broader implications are a cautionary tale for business owners of all stripes.

Avoid letting personal issues sabotage business assets. As shown in this case, a well-run business can be dismantled by mismanagement, poor compliance and the absence of structural safeguards.